Advance Tax:Details-What, How, Why
“In this world nothing is certain but death and taxes” said Benjamin Franklin (Founding father of USA and face on America’s One hundred dollar bill/note).
What is Advance Tax?
Advance tax, as the name implies, is the tax that one pays in advance. Advance tax is the income tax that is payable if your tax liability exceeds Rs 10,000 and should be paid in the same year in which income is received. It is also called as “Pay as you Earn” scheme, since you pay the tax in the same year in which you earn income.
Who pays Advance Tax?
Advance Tax is NOT applicable when
- From AY 2011-12 – When a taxpayer opts for the scheme of computing business income under section 44AD on presumptive basis @ 8% of turnover, such taxpayer shall be exempted from payment of advance tax for such business.
- From AY 2013-14 – A senior citizen (resident individual who is 60 yrs or more) who does not have any income from business & profession, is not liable to pay advance tax.
Why Pay Advance Tax?
Advance tax is one of the major tools used by the Govt. to collect tax from the assesses all over India. This prepaid form of tax is designed in such a way that an assessee is made to pay tax to the Govt. in a ‘Pay as You Earn Scheme’. This mainly aims at reducing the last moment hassles to an assessee for payment of tax liability which may be because of either shortage of time or funds.
The aim of the Indian government behind setting up the advance tax system was to speed up the tax collection. This system also allowed the government to earn interest on the amount collected as tax, thus increasing funds to the government coffers.
What if we do not Pay Advance Tax?
If you have to pay advance tax and If you fail to pay your Advance Tax or, if you pay less than the stipulated tax, you would be penalised and would have to pay extra under Sections 234A, 234B, 234C. So there is no escaping Tax. As Income Tax office says “Pay Tax Karo Relax“
The interest is calculated at 1% simple interest per month on the defaulted amount for three months. The interest penalty would continue up to the next deadline. If even after the last deadline of 15 March, the tax is not paid, then the 1% would be on the defaulted amount for a month, until the tax is fully paid.
How is it Calculated?
Advance tax is computed on income that an individual might earn during the year, in that sense it is estimated income. The tax is calculated using the rates applicable for the financial year.
Suppose after paying your first installment of tax on the estimated income, you actual income increased due to some shares/mutual funds you sold, You will need to revise your income and accordingly pay the differential in the next installment.
Advance tax dates and tax payable
|Due Date||Installment % of Advance Tax|
|15th September||Up-to 30%|
|15th December||Up-to 60%|
|15th March||Up-to 100%|
For example, suppose your total tax liability(after deducting TDS) for this year is Rs 1,00,000/-.
So by 15th September you will need to pay 30% which comes to Rs 30,000/-.
By 15th December you will have to cover 60%, so you will need to pay another Rs 30,000/-.
By 15th March, 100% of advance tax comes to Rs 100,000/, you will need to pay another Rs 40,000/-.
How to pay advance Tax?
Advance Tax can be paid by filing a Tax Payment Challan,ITNS 280.Challan, at designated branches of banks empanelled with the Income Tax Department. Branches of ICICI, HDFC and SBI accept Advance Tax Payment Challans. Alternatively, individuals could pay Advance Tax online through the Income Tax Dept / NSDL website. More on this later.
Penalty on not paying/paying less Advance Tax:Sections 234A, 234B and 234C.
Under section 234A, the liability arises only when the return is filed after the due date which is 31st of July. Ex: Due Date for current year, which is Assessment Year 2013-2014 or Financial Year 2012-2013 is 31st July 2013.
Under Section 234C, there are three components. For the first installment, the shortfall penalty is calculated for 3 months @1% p.m. Similarly, in the second installment, the shortfall penalty is also calculated for 3 months @1% p.m and the final installment is calculated at a flat rate if 1% for 1 month only.
Finotax has great Advance tax calculators. Check it out here. Let’s look at these sections in detail.
Interest under section 234 C
234 C will be applicable if you don’t pay your advance taxes in regular installments. As per the Income Tax Act, you’re suppose to pay 30% of your advance tax by 15th Sep, 60% by 15th December and 100% by 15th March. Let’s see it through some examples.
Rahul has estimated his total tax payable as Rs.1,00,000 for this financial year. Let’s see how 234 C will work if he didn’t pay anything.
|#||Particulars||Expected Payment (1)||Paid(2)||Shortfall(1-2)||234 C Calculation||234 C Interest in Rs.|
|1||By 15th September||30,000||0||30,000||1% p.m. for 3 months upto December 15 th on Rs. 30,000||900|
|2||By December 15th||60,000||0||60,000||1% p.m. for 3 months upto March 15th on Rs. 60,000||1,800|
|3||By March 15th||1,00,000||0||1,00,000||1% p.m on Rs. 1,00,000||1000|
|Total 234 C||3,700|
*Tax Payable = Income Tax on total Income – Tax Deducted at Source.
Interest under section 234 B
234 B will be applicable when total advance tax paid is less than 90 % Tax Payable. This will be charged at 1% per month till you pay your remaining taxes. Let’s work it out through an Example:
Rajan has estimated his total taxes payable as Rs.1,00,000 and he has paid 50,000 as advance Tax till March 31st 2013. He pays the balance in July while filing his income tax return. Let’s see how 234 B will be applied to him
|1||Total Tax Payable||1,00,000|
|2||Advance Tax paid till March 31st 2013||50,000|
|3||Balance Tax Payable (as of March 31st 2013)||50,000|
|4||Interest @ 1% / Month on 50,000||500 / Month|
|5||234 B = (for 4 Months ( Apr – July) 4 * 500)||2000|
If you pay our taxes in between April – July period then interest @1% will be applied only on the balance tax payable .
- There will have been be no default in respect of the first instalment (Rs 3,000, which is 30 per cent of Rs 10,000).
- The second installment amount should, however, have been Rs 3,000 (60 per cent of Rs 10,000, less Rs 3,000 paid in the first instalment). Hence, the shortfall is Rs 1,000, on which the interest payable is Rs 30 (1 per cent of Rs 1,000 for three months).
- Since the third installment is Rs 4,500, there will have been a shortfall of Rs 500, on which the interest charged would be Rs 5 (1 per cent of Rs 500 for a month).
Online Advance Tax Calculators(Free)
Paying Advance Tax
As mentioned earlier Advance Tax can be paid by filing a Tax Payment Challan, ITNS 280 Challan, at designated branches of banks empanelled with the Income Tax Department or through the Income Tax Dept / NSDL website.
ITNS 280 Challan:
One can download ITNS 280 Challan from here. Fill it up and pay at the at designated branches of banks empanelled with the Income Tax Department. If you need help in how to fill challan one can see the slide show at incometaxindiapr.gov.in. This is relevant but old so please fill the correct assessment year.
Pay Online or e-Payment
e-Payment facilitates payment of direct taxes online by taxpayers. To avail of this facility the taxpayer is required to have a net-banking account with any of the Authorized Banks.
For ePayment Click here
Disclaimer: I am not a chartered account. This article is just for informational purpose.
It is said “Income tax returns are the most imaginative fiction being written today.” Hope you found the article helpful. Please share your comments.
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